Brand risk
Towards a meeting
of professional minds
2008 Palisade User Conference
© David Abrahams 2008
david.abrahams@brandmediation.com
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Brand Mediation
© David Abrahams 2008
David Abrahams
23 years brand management, new product development and
senior commercial management
10 years risk advisory
Accredited commercial mediator (MCIArb)
April 2008
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Presentation
© David Abrahams 2008
Overview
Interest in brand risk – why?
The marketing task
Risk literacy – what?
Analysts as advisors and facilitators
“Meeting of professional minds”
Useful frameworks
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© David Abrahams 2008
Brands
Acknowledged value
Rank
Brand
Country of origin
Sector
Brand value
(MM)
1
Coca-Cola
US
Beverages
$65 324
2
Microsoft
US
Computer software
$58 709
3
IBM
US
Computer services
$57 091
4
GE
US
Diversified
$51 569
5
Nokia
Finland
Consumer electronics
$33 696
6
Toyota
Japan
Automotive
$32 070
7
Intel
US
Computer hardware
$30 954
8
McDonald's
US
Restaurants
$29 398
9
Disney
US
Media
$29 210
10
Mercedes
Germany
Automotive
$23 568
Source: Interbrand (2007)
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Brand risk?
© David Abrahams 2008
Investor perspective
Intangibles: an increasing proportion of enterprise value
-
Tangibles readily reproduced or supplanted
-
Well-managed brands appreciate with use
-
Risk-efficient growth
Regulatory emphasis on forward-looking statements
-
Risks and opportunities (strategic, financial, operational)
-
Sustainability of demand
-
Stakeholder relations (not limited to customers)
Brand exposure to corporate conduct
-
Reputation risk (“licence to operate”)
-
Reliance on third parties (outsourcing)
-
Merger and acquisition (discontinuity)
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Marketing task
© David Abrahams 2008
Professional challenge
Critics
-
“Lack of financial accountability”
-
“Operational indiscipline”
-
“Creative for its own sake”
IN FACT licensed (supervised) risk-takers
-
Markets: “open systems” (competitive; uncertain)
-
Innovation inherently risky (predict or shape demand)
-
Investment in stationary markets potentially ineffective (regression)
MEANWHILE pressured for certainty of outcomes
-
Single-point targets (caricature: super-safe, overambitious or imposed)
-
Brand investment raids (short-term focus; contingencies removed)
-
Often no financial case for market research (value of new information)
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Risk literacy
© David Abrahams 2008
Opportunity for marketers
Third necessary competence
1. Strategic insight
2. Financial understanding
3. Risk literacy
Underpinning knowledge (conceptual and practical)
-
Awareness of risk attitude (self and others)
-
Techniques for risk analysis (sound decision-making)
-
Frameworks for risk management (operational effectiveness)
Meeting of professional minds
-
Improved cross-functional communication (credibility)
-
Improved influence (“uncertainty absorption”)
-
Improved brand performance (pre-emption or preparedness)
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Risk literacy
© David Abrahams 2008
Meeting of professional minds
How to achieve this?
Common understanding of “brand anatomy”
Risk modelling tools
Mediating frameworks
-
Elicit risks and uncertainties
-
Operational relevance (marketers)
-
Applicable in modelling (analysts)
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© David Abrahams 2008
Brand anatomy
A three-part asset
Legal asset (identity):
protect rights
Relational asset (people):
build affinities
Economic asset (value):
maximise return
Interdependent
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© David Abrahams 2008
Brand anatomy
Essentials
Customers
Employees
Brand
Community
Investors
Partners
Regulators
Source: Abrahams (2008), reproduced by permission of Marsh Ltd
Possible : 1 stakeholder, 2 perspectives
Mindjet MindManager Map
Reality : overlap and interaction
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Brand anatomy
© David Abrahams 2008
Affinity can be measured and applied in predictions
BrandDynamicsTM loyalty pyramid
BrandVoltageTM conversion index
Brand X
2007
45
Advantage
79
Performance
84
Relevance
93
Presence
94
‘Bonding’ correlated with current sales share
Source: Millward Brown, reproduced with permission
Bonding
Distributions for predictive modelling (growth)
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© David Abrahams 2008
Brand risk assessment
Three frameworks
Brand valuation
- Assess contribution and condition
Dependency modelling
- Structure marketing programmes
+
Marketing Due Diligence 1
- Challenge marketing plans
1
McDonald, Smith and Ward (2006)
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© David Abrahams 2008
Brand valuation
“Economic use” : NPV of attributable earnings
Deduct operating costs
and other charges
=
Net earnings
Years 1-5 +
Net earnings
Years 1-5 +
Reward contribution
of tangible assets
=
Earnings from
all intangibles
Earnings from
all intangibles
Adjust intangible earnings
for direct role of brand
=
Earnings from
brand alone
=
NPV Years 1-5 +
(brand value)
Revenue
Revenue forecast
forecast
Years
Years 1-5
1-5 ++
Earnings from
brand alone
Select discount rate on
brand strength and apply
RISK
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Brand valuation
© David Abrahams 2008
Brand strength factors (example)
Source: Abrahams (2008), after Lindemann (2007)
Mindjet MindManager Map
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Economic use valuation
© David Abrahams 2008
Review
Comparable royalty rate for perspective (available?)
Exercise of judgement (risks and uncertainties)
Valuation changes with context (“use”)
Other dependent cash flows (deducted)
Benefits of process (recognition; due diligence)
Balances short-term and long-term thinking (consistency)
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Dependency modelling
© David Abrahams 2008
Intuitive beginning
Mindjet MindManager Map
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Dependency modelling
© David Abrahams 2008
Essentials
Fault tree variant
Positively phrased
-
Stated marketing objective(s)
-
What needs to go right
-
Descending hierarchy of events (dependencies)
Logic gates
-
AND (systemic weakness)
-
OR (systemic strength)
-
Input failure rates for lowest-level events (primary or not modelled)
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Dependency modelling
© David Abrahams 2008
Without failure rates
Illustrative example
(product introduction – detail)
Mindjet MindManager Map
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Dependency modelling
© David Abrahams 2008
Uniform failure rate added
0.1% failure rate
10% failure rate
Illustrative example
(product introduction – detail)
1% failure rate
10% failure rate
Compare
10% failure rate
19% failure rate
13% failure rate
2% failure rate
10% failure rate
10% failure rate
10% failure rate
A uniform 10% failure rate for all
Mindjet MindManager Map
inputs reveals structural influences on risk before these are obscured by the different failure rates for each item
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Dependency modelling
© David Abrahams 2008
Review
Key benefits
-
Tests operational assumptions (or understanding)
-
Makes risk relevant (including mitigation planning)
-
Captures and keeps knowledge
Key features
-
Reflects sensitivity to common root causes
-
Reveals counter-intuitive outcomes (system effects)
-
Calculates expected value of mitigation steps
Key considerations
-
Structure
-
More detail predicts higher failure rates?
-
Closed system
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Marketing Due Diligence
1
© David Abrahams 2008
Recognising risk in marketing plans
Source: 1 McDonald, Smith and Ward (2006)
Mindjet MindManager Map
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Marketing Due Diligence
1
© David Abrahams 2008
Recognising risk in marketing plans
Source: 1 McDonald, Smith and Ward (2006)
Mindjet MindManager Map
22
© David Abrahams 2008
Dependency modelling
Applying due diligence criteria to failure estimations
1
Source: 1 McDonald, Smith and Ward (2006)
Mindjet MindManager Map
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Conclusions
© David Abrahams 2008
Towards a meeting of professional minds
Fundamentals
-
Marketing must retain its “culture of advocacy” (appropriate risk-taking)
-
Risk awareness comes with experience (junior < senior)
-
Different degrees of mathematical tolerance (personalities; functions)
Positioning
-
Risk literacy: add to quality of the plan (success)
-
Risk literacy: learn how to take risk (decisions)
-
Risk literacy: communicate with credibility (influence)
Quantitative analysis
-
Simplify to illuminate (materiality; decision-makers’ eyes)
-
Always in tandem with qualitative analysis
-
Avoid isolation (link to operational plans)
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Brand risk
References and bibliography
Abrahams, D.J. (2008), Brand Risk: Adding Risk Literacy to Brand Management, Gower
Arium Ltd. (2003), Making Sense of an Uncertain World,
http://www.arium.co.uk/products/dependency.htm
Interbrand (2007), All Brand Are Not Created Equal: Best Global Brands 2007, Interbrand in
association with BusinessWeek
Lindemann, J. (2007), Brand Valuation: The Economy of Brands, Interbrand
Mando Brand Assurance, http://www.mando.co.uk/
McDonald, M., Smith B. and Ward, K. (2006), Marketing Due Diligence: Reconnecting
Strategy to Share Price, Butterworth-Heinemann
Millward Brown BrandDynamicsTM,
http://www.millwardbrown.com/Sites/MillwardBrown/Content/Services/BrandDynamics.aspx
Mindjet, LLC, http://www.mindjet.com/us/products/mindmanager_pro7
Palisade Corporation, http://www.palisade-europe.com
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david.abrahams@brandmediation.com
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Brand risk
Towards a meeting
of professional minds
2008 Palisade User Conference
© David Abrahams 2008
david.abrahams@brandmediation.com
27